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Education

Portfolio of merchant acquirers. Today's owner/operators are just as
likely to have a background in finance as in sales. As such,
rationalization the industry is bearing witness to a surge in operational
expertise and business acumen among its leading
management. Furthermore, this surge in operational
By Adam T. Hark competencies has precipitated implementation of new
standards for best practices in building quality portfolio
Preston Todd Advisors assets. One new best practice caught my eye recently during
an auction, and I feel there's tremendous value in bringing
nce upon a time, a merchant was a merchant it to the forefront of the industry: portfolio rationalization.
was a merchant. The putative strategy in mer-
chant acquiring was simple: board as many Sophisticated cost-benefit analysis
O accounts as possible – big merchants, small
merchants, low-risk merchants, high-risk merchants and If you haven't heard the term "portfolio rationalization" in
even new LLCs – basically any merchant with a checking your discussions with merchant acquiring owner/opera-
account and an "open for business" sign. The rationale was tors, you will. Though the concept isn't new, the terminol-
straightforward: payment processing produced real, actu- ogy is, and its relevance continues to gain import in the
alizable revenue that made merchant acquiring lucrative. industry. My first exposure to this term came by way of
a sophisticated operator in the space, former investment
Fast forward to 2017, and much has changed, not the least banker John Wu, Managing Partner at Anaraq Holdings
of which is margin compression on basic transactional LLC. While working with John on an M&A transaction, I
processing. The merchant-is-a-merchant-is-a-merchant had to explain the concept of portfolio rationalization to
strategy is no longer viable. The fact that so many leading many of the prospective buyers. Though the concept isn't
acquirers have transitioned their revenue models away from new, its increasing adoption as an effective way of increas-
a dependency on transactional processing, and toward the ing a firm's profitability is.
delivery of technology based, value-added products and
services, is a defining attribute of today's new merchant The basic premise behind portfolio rationalization is per-
acquiring paradigm, and one that will surely last. forming a cost benefit analysis on the new merchants a
merchant acquirer boards, as well as those merchant iden-
Beyond the product offering evolution, a second, and tification (MID) numbers that already exist within an ac-
perhaps more consequential change in the merchant quirer's portfolio. The objective of the owner/operator is
acquiring paradigm comes from the increased sophistication the identification of low- to no-revenue (or even negative
revenue) accounts: accounts that may require costly, high-
touch customer service
from the acquirer and/
or setup and equipment
costs commensurate
with those required for
high-revenue, highly
profitable accounts.
Purge of
underperformers

The portfolio rational-
ization process essential-
ly purges these costly ac-
counts from an acquirer's
existing book, and es-
tablishes minimum pro-
cessing thresholds for
new boards so that the
resultant portfolio pri-
marily comprises qual-
ity, high-revenue and
high-margin accounts.
Data analytics show that
over the past 30 months,

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